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A Real Medicare Crisis

by Ed Pintzuk (October, 1999 MichUHCAN Newsletter)

The real crisis of Medicare is the attempt to overhaul it and delete from it the original concept of social insurance-the idea that a society should provide for the well-being of its citizens.

Medicare, at $220 billion, is the second largest item in the federal budget after Social Security. Medicare has a more immediate financial problem than does Social Security, which is sound until 2032; Medicare is projected to be sound until 2008. But the history of Medicare is that every five to eight years there seems to be a crisis that is resolved in one way or another.

The privatization being proposed now is not, however, a resolution but a crisis itself. Pushing for such an overhaul is an alliance of anti-big government forces plus private sector health care interests devising schemes to open the system for free-for-all market competition.

This coalition is growing very rapidly and the stakes are huge. Presently, Medicare managed care plans have 17% of the Medicare enrollees (about 7 million people). The aim of the alliance is to achieve 50%. This would provide the insurance companies with a new $60 billion in premiums. Medicare was opened to HMOs in the 1980s in an attempt to stabilize its finances. Up until then cutting expenditures by reducing hospital and medical payments was the main way to balance its budget. The general revenues picked up any expected short-fall.

But private HMOs haven't worked and won't work; rather they drain precious health care resources.

Do The Math

The current average payment to HMOs is $5,300 per year. But 19% of Medicare HMO enrollees cost the program nothing in any current year. Fifty percent cost the program $500 or less. The overwhelming majority of Medicare enrollees cost the program 1% of total Medicare spending. But 4% of Medicare patients account for 46% of the costs, over $25,000 per enrollee per year. This demonstrates the potential-and strong motivation-for companies to "skim off" the healthier, lest costly enrollees. Such skimming actually dwarfs any other way to make a profit.

There is proof that HMOs are doing exactly that; instance after instance of this has happened.

Those who left an HMO and returned to traditional Medicare are 80% more expensive; their leaving benefited the HMO.

Medicare pays the HMOs 95% of what it spends for those enrollees on fee-for-service Medicare. The 5% reduction is based on the concept that the HMO should be able to perform the same service for less. But studies have shown that because HMOs enroll a high percentage of healthy people they are able to spend 85%-90% of what Medicare gives them, leaving a tidy profit.

As Senator Edward Kennedy said in January, Social Security and Medicare "are among the highest achievements of our history…They are true social insurance." Turned over to the private market, Medicare would instead become a plan for ensuring HMO profits.

Facts on Pharmaceuticals:

  • Universal healthcare systems in other industrial nations mean drug prices are one third to one-half lower than in the U.S.
  • With drug prices rising at four times the rate of all health expenditures, 52% of all drug costs are now paid out-of-pocket.
  • Medicare beneficiaries who must buy outpationts drugs themsleves are charged about twice as much on average as the price paid by large purchasers like major HMOs.